by

Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

Washington, D.C.
January 25, 2011

Thanks once again to the Staff of the Division of Corporation Finance and the other contributing Divisions and Offices for your work on the two releases before us today. Once again, I commend you for your extraordinary effort to try and produce well-considered rules despite the daunting timelines dictated by Dodd-Frank. While I have not been able to support some of these rules ultimately, and today is no exception, your dedication and professionalism are without question.

In that vein, I support the proposed rule to implement amendments to the net worth standard for accredited investors under Section 413(a) of Dodd-Frank. However, I am, unfortunately, unable to support the staff’s recommendation on adopting rules implementing Section 951 of Dodd-Frank, which requires advisory shareholder votes on executive compensation and golden parachute compensation — provisions widely referred to as “say-on-pay.”

My analysis of both of these releases focuses primarily on the way we have considered and approached the adverse impact and burdens on smaller companies and capital formation in our implementation of the new law’s requirements. The staff’s recommendation relating to the net worth calculation for accredited investors gives due consideration to the implications of this standard on small companies and capital formation. Conversely, I believe the say-on-pay rules we are adopting today are unduly restrictive and impose unnecessary burdens, particularly on smaller reporting companies, with minimal corresponding benefits for investors.

Net Worth Standard for Accredited Investors

Section 413(a) of the Dodd-Frank Act requires that the definition of accredited investor, for purposes of certain private placement exemptions such as Regulation D, exclude the value of a natural person’s primary residence from the calculation of the person’s net worth. As a result of this change, some investors that previously qualified as accredited investors under the net worth test will cease to satisfy this test.

Small businesses are far more likely than larger businesses to have investors that are on the cusp of meeting the net worth standard; as a result, small businesses will be affected by this provision more than will larger businesses.

Section 413(a) is not specific about how the value of a person’s primary residence should be excluded from the calculation of their net worth — in particular, whether the amount of related indebtedness, as well as the value of the home itself, should be excluded from this calculation. The release very sensibly proposes that the amount of associated indebtedness be excluded, but only to the extent that such indebtedness does not exceed the value of the home. The Commission has taken a similar approach in other contexts, and this approach ensures that we do not unduly restrict natural persons from investing in private placements.

It may be more difficult for smaller businesses to attract capital from larger investors than for larger businesses, and the pool of natural persons who qualify as accredited investors is finite. Thus, I appreciate that the approach that the staff has taken would fully implement Congressional intent while minimizing the impact on this pool of potential individual investors, and the resulting effect on capital formation.

I would note that the proposing release requests comment, but does not include a recommendation, on how the proposed rules should apply to the ability of an existing investor in a company to purchase additional shares in that company, including pursuant to rights under a contract with the company and other investors, if this provision results in that investor no longer qualifying as an accredited investor. I do not believe it would be consistent with Congressional intent to harm existing investors by effectively stripping them of these contractual rights by precluding them from making further investments. Accordingly, I strongly encourage affected investors and companies to comment on this issue.

Section 951 of the Dodd-Frank Act requires that all public companies conduct a separate shareholder advisory vote to approve the compensation of executives, as well as a separate advisory vote regarding how often an issuer should conduct a say-on-pay vote. This section also requires that companies soliciting votes to approve merger or acquisition transactions provide disclosure of so-called “golden parachute” compensation arrangements and, in certain circumstances, conduct a separate shareholder advisory vote on those arrangements.

Importantly, subsection (e) of that provision also provides authority to the Commission to exempt issuers from these provisions, and explicitly directs the Commission, in exercising this authority, to consider whether these requirements disproportionately burden small issuers.

While I appreciate that the adopting release delays implementation for smaller reporting companies for two years, I do not believe it is appropriate to subject them to the say-on-pay requirements at all.

In giving effect to this provision of the Act, it is important to consider the underlying rationale for these requirements, the overarching purpose of the new law and the explicit exemptive authority provided to us.

To the degree that the new requirements were justified or intended as a response to concerns about pay practices at large financial firms that were cited as a factor in fueling risk-taking that played a role in the financial crisis, the requirements’ relevance and effectiveness diminish when applied more broadly to all public companies and, in particular, when applied to smaller public companies.

To the degree this provision is intended to give effect to shareholders’ interest in weighing in on executive compensation more generally, the proposed rule goes beyond what the law requires and adopts an unduly restrictive approach.

It does so in two key respects.

First, In our proposing release, we provided for a company to exclude from its proxy materials, pursuant to Rule 14a-8(i)(10), a shareholder proposal relating to certain say-on-pay votes if the company’s frequency determination is consistent with the plurality of votes cast in the most recent frequency vote relating to say-on-pay. Under the rule we are adopting, however, such a shareholder proposal may only be excluded if one of the three frequency choices garnered a majority of the votes cast and if the company’s frequency determination is consistent with that majority vote.

The instances in which one frequency option receives a majority vote in a tripartite vote may be quite rare. Thus, in many if not most cases, this vote is likely to be effectively meaningless — where there is no clear mandate, management is not likely to be influenced by the shareholder vote because there is no way to guard against a shareholder proposal that second-guesses their frequency determination. The exception may be where the issuer's recommendation lines up with the recommendation of proxy advisory firms, whose influence is already, in my view, concerning. Notably, I have seen press reports indicating that ISS, the most influential of these proxy advisory firms, has determined that it will recommend a one-year frequency vote for all public companies, without regard to their individual circumstances or attributes. Thus, at best, the frequency vote will be largely an expensive, but useless, exercise. At worst, I fear we may have inappropriately placed our thumb on the scale to ensure that companies and shareholders have no real choice on the frequency vote, but to do what the proxy advisory services recommend.

Our approach in the proposing release was consistent with the requirements and intent of the statute and reflected greater regard for the impact of our implementing rules on issuers. Moreover, there were other options that we could have chosen. Instead, we have adopted the option that was among the most burdensome for public companies.

Second, in a public company’s first proxy statement and annual report following an IPO, it will report executive compensation that includes amounts paid while the company was private, under arrangements that likely were replaced upon going public. I believe that, as we did with respect to a company’s initial compliance with requirements relating to internal controls over financial reporting, we should not require IPO companies to hold their first say-on-pay vote until after they have completed one complete annual reporting cycle.

Because I do not believe we have appropriately used our discretion to minimize the incremental burdens that these rules will impose on public companies, and in particular on smaller reporting companies, I am unable to support them.